Survey firm comes up a winner in Intuit blowup

ThomCalandra

Shulman, director of research for ChangeWave Research, more than a month ago laid out Intuit's
INTU, -2.51%
woes, which hit the stock Friday after the maker of TurboTax and other accounting software said it won't grow as fast as investors expected.

ChangeWave digests surveys from a base of 4,000 professionals, then draws conclusions about industries and individual companies. Its TurboTax survey on Feb. 13 drew 659 respondents, "a tremendous number of people for our surveys," Shulman told me Friday.

"We had very unambiguous results that a lot of people use TurboTax but the number this year was growing in single digits, which is not enough to meet growth targets," the research director said. "The core of Intuit's growth has been the consumer tax unit the past two years. So we posited that this would have a material impact on the company's revenues."

Convincing Shulman and his team to air their turbo-views was the news from the California company, not long before the first ChangeWave survey was published, that the tax software's revenue indications were rising 11 percent -- "not a really big number compared to the past two years," he said from his Maryland office.

To quote from the Feb. 13 ChangeWave report: "Over the past three fiscal years, tax product and service revenue has grown 61 percent while company revenue has grown 30 percent. Tax software and preparation revenue was 26 percent of all revenue in fiscal 2002. Growth in consumer tax revenue as a percentage of the growth in company revenue was 50 percent in 2001/2000 and 38 percent in 2002/2001."

The report, based on the survey of professionals, went on to say, "Intuit is a great brand with excellent growth prospects but also is a stock with a forward P/E (our estimate) north of 35. Avoid or short the stock."

ChangeWave issued its final Intuit report Feb. 19, when the shares were selling for $45 on Nasdaq. On Friday, the stock had fallen about 21 percent by midday to $39.60.

ChangeWave does 125 surveys a year -- generating consumer and professional attitudes toward products in the world of computers, computer peripherals, prescription drugs, generic drugs and other areas.

What's ahead?

Shulman sees a "particular savagery in the business-to-business software area. One of the things people are missing in this Iraq conflict is that two-thirds of consumers say their lack of confidence is due to general business conditions, not war, And in the corporate world, 71 percent according to our technology spending survey say their spending is related to a general soft business environment."

That percentage -- 71 percent -- is a big number. "Consumers are cutting back because of the stock market, so it becomes a negative cycle: business waits for consumers, consumers wait for stock market, stock market waits for business spending"

In the tech-spending survey from ChangeWave, completed at the end of February, business-to-business and security software, along with flat panels and other computer accessories "took a big hit."

"The companies in these spaces have fine products and plenty of cash, but they are not going anywhere. That spells valuation concerns," he says.

In the past 15 months, ChangeWave's surveys have concluded that consumers and businesses are changing the way they buy software. Shulman and his team found tremendous price pressure, a shift to flat-rate pricing and a move on the part of corporate buyers to spend, and plan to spend, on just a quarter by quarter basis. "Yellow-light spending, we call it."

All of this makes predicting future business, and sales, tough. "If you marry that to a lack of technological innovation, you have a perfect storm where people don't feel a need to spend money, say on enterprise software or customer relation management," he says.

Shulman acknowledges that these companies' shares already have been hit hard. Yet the worst may be yet to come for the group. The aforementioned companies have market capitalizations that start at $5 billion and head north from there.

"All the gods of purchasing are lined up against them," he says. "They are all good companies, but their businesses are going nowhere."

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